Favourites

(Update) The post-Budget rout of shares in specialist annuity provider Partnership Assurance (PA.L) showed no signs of abating today as analysts debated the impact of the chancellor's pension reforms on the company and its larger rivals in the life insurance sector.

Partnership is down 9.2%, or 13.1p, at 129.9p, after its share price more than halved yesterday. It was hit by plans announced in yesterday’s Budget for an overhaul in pensions legislation which would remove the need for many people to buy an annuity when they retire. An annuity is a life insurance contract that converts an individual's pension savings into an annual income for the rest of his or her life.

Partnership: 'exceptional buying opportunity'?

Panmure Gordon analysts Barrie Cornes and Keith Baird argued the hammering Partnership took yesterday, when its share dropped by 55%, was an overreaction, and represented ‘an exceptional buying opportunity’.

They claimed it had dropped to a valuation that was close to assuming no new business would be written, but that while the annuity market would be reduced by the government’s plans, there would still be demand for the products.

‘Share prices have been hit hard to the point where we think the market is assuming no new annuities will be written going forward,’ they said. ‘We think the product will still be acquired given the need for security of income in old age.’

They even see some positives for Partnership from the Budget, pointing to chancellor George Osborne’s pledge that savers will be given the automatic right to face-to-face advice on retirement. This could lead to those who do decide to buy an annuity shopping around more for the best option rather than relying on their pension provider, a trend which Panmure sees as positive for Partnership, which offers ‘enhanced’ annuities – those that offer a better rate for those with poorer health conditions.

Fellow specialist annuity provider Just Retirement (JRG.L) has suffered similarly, dropping 11.5p or 7.6% to 142.2p, after a 42% drop yesterday. Panmure Gordon believes that, as with Partnership, this represents a buying opportunity.

Or damaged beyond repair?

Others are less optimistic. Analysts at Barclays dealt Partnership a double downgrade, moving it from 'overweight' to 'underweight', warning it could fall further even after yesterday’s battering. It argued the Budget could lead to the demise of the UK individual annuity market, with sales plunging by two-thirds from £12 billion to £4 billion a year within the next 18 months.

This will prove particularly painful for Partnership, which concentrates solely on annuities and whose business model ‘is potentially irrevocably damaged’, according to Barclays.

‘Yesterday’s Budget has severe ramifications on the business model of Partnership, which is particularly acute given new business accounts for nearly 98% of its profitability in any one year, and individual annuity sales account for 90% of total sales,’ it said. It has cut its price target for the company by two thirds to 125p.

Canaccord Genuity lowered its price target to 130p and predicted a run-off of the business as the most likely outcome of the Budget bombshell. ‘We would note that additional costs could be incurred in run-off which could make a discount appropriate, albeit that some level of new business may be maintained in the near term,’ it said.

Blue-chip insurers weather storm

The picture for larger insurers is less bleak, with annuities representing just one flank of their operations, and a large proportion of those earnings being derived from historic and bulk annuity business, both of which are unaffected by the Budget announcements.

That did not stop large falls in their share prices yesterday. Legal & General (LGEN.L), Standard Life (SL.L), Resolution (RSL.L) and Aviva (AV.L) fell by 8.4%, 3.9%, 4.6% and 5% respectively following the Budget.

Legal & General and Standard Life have staged modest recoveries today, rising 1.3% and 1.2% respectively, while Aviva is largely flat, up 1.3p to 491.7p. Resolution, however, has continued its decline, dropping a further 14.9p, or 4.5%, to 320p.

Analysts at Bernstein Research, Shore Capital and Barclays have all judged the drop in Legal & General’s share price to have been an overreaction. Barclays said the drop represented a buying opportunity, arguing that while the insurer was a large annuity player, a large proportion of its business was in bulk annuities sold to corporate customers, where it could offset any slump in the individual market. Shore Capital meanwhile argued that Legal & General’s fund management arm could benefit from the annuity changes.

Resolution’s statement to the market this morning that it could benefit from greater pension savings as a result of the Budget changes has done little to sway the market’s focus on the impact of a decline in annuity sales.

While Shore Capital has maintained its 'hold' recommendation, saying it was ‘unconvinced by Resolution’s strategy and product offering’, other analysts believe that, as with other large blue-chip insurers, it is suffering from a market overreaction.

Edward Houghton, senior analyst at Bernstein Research, claimed the sell-off in Resolution looked ‘a little overdone on the basis of our initial impact estimates’. Barclays has meanwhile reduced its price target by 4.5%, but at 361p this is still well above the current level. ‘The dividend is safe and well covered for many years, although unlikely to grow unless it can find an alternative avenue for growth,’ it said.

Standard Life and Aviva, both big annuity players, are nevertheless tipped to ride out the shake-up to legislation due to the diversity of their businesses. Standard Life generates more of its earnings from annuities than either L&G or Aviva, but Barclays pointed to its position as the largest player in both the Sipp (self-invested personal pension) and drawdown market as a potential offset to a decline in that business. Aviva meanwhile has the largest annuity business in the UK, but its diverse operations, including a substantial general insurance arm not shared by many of its peers, will limit the impact of yesterday’s changes, according to Barclays.

Whilst deciding to draw down an entire pension pot without a sizeable alternative income might, in some circumstances, be seen as bizarre and lacking in forward thinking, the abilty to do so simply provides further planning alternatives and frees pension invetsors funds from an overweening state.

Presumably one will be taxed on any drawdown monies as 'income'. That being the case, why would anyone logically exceed the higher band tax threshold (unless desperate).

Drawdown. The government seems to assume that £12k of assured income will be covered by the state pension. Unless you have another annuity paying this value, then you would require to wait until official retirement age (say 67) before being able to take drawdown. Not so smart!

Drawdown at 40 % tax then invest in a Vct for 30% tax relief put the vcts in a trust fund to avoid IHT. If you live 7 years you end up with a 10% tax liability against the 55% and worse if left in pension fund.

Kenpen2, I think you are right. Plus, the ability to increase your savings within a tax free environment should not be sniffed at.

One oddity about pensions is that any pension that has not vested (which is what occurs when you go into partial drawdown) if you die before the age of 75 is not only outside your estate for IHT purposes, but also does not attract the 55% penalty. So, amazingly, it goes to your heirs completely tax free!!! If you are likely to die before 75, be careful about how much pension you vest.

Drake is perfectly correct and this from an IHT perspective a very good planning tool. However, in my experience most people Nominate their spouse as the beneficiary which would be exempt from IHT if forming part of the deceased's estate in any event!

The question I am uncertain about is if you have a pot and want to remove it and are a non tax payer can you recover the tax via HMRC return or can you demand it be paid gross per se?

Martin - Yeah but - the remaining pension pot then becomes subject to Inheritance Tax in the widow's estate.

As regards your question, the legislation hasn't been published yet, but it looks as if the pension pot will be treated as income for the tax year it is taken. This means you would have to declare it on your tax return and HMRC would then calculate the tax payable. Just receiving the pot gross doesn't mean you can go and blow it all on the 2.30 at Thirsk . . . . !

If you are going to live to 75 plus then you need to worry about the 55% of your fund which will be taken in tax. Drawdown when taxed as income at 40% can be reinvested in VCTs, with 30% tax relief then placed in a trust fund for heirs, Thus reducing the tax to 10%, if the trust fund beneficiaries are non tax payers, or they too use it as income drawdown, within their own tax allowance it secures your money in the family.

Cae, I may be wrong, but I think the 55% tax at age 75 only applies to non-vested pension. So if you vest it before then you can go on with drawdown at a limited rate (around 7-8% of the pot). Under current rules, if you draw too much it will be taxed at 55%, but Georgie Boy has just scrapped that from next year. You will have a dilemma if you are feeling unwell a week before your 75th birthday!

I accept that you can carry on drawdown after 75, however, your pension pot is then liable for 55% on your death. Your widow will only benefit from 45 % of the pot you have built up. To avoid that, yes dying before 75 would be financially ideal, but you may wish to postpone hanging up your clogs.

If so my plan above would hopefully avoid giving away the 55% for 40% IT, then recouping 30% relief in a VCT, if you don't need the money, then IHT planning would suggest an inheritance trust for your heirs. I think that some of us will see the budget as the only good thing George has done for the pensioners!

The proposed changes announced yesterday are very welcome. Their impact (assuming they are not headed off at the pass by the vested interests) will be different for each individual. That is the whole point and is entirely as it should be (and always should have been).

Individual decumulation strategies will certainly change. Precisely how they will change for any individual is unlikely to be very clear at this point except for the really wealthy and the really not wealthy. The only thing that has become clear is that finding the 'best' solution will become a much more complex problem to solve for most people.

Typically the knee jerk logic of the 'investment community' looks flawed. Sure, fewer people may buy annuities. Yet most people will continue to require investment management and will keep their funds invested for longer. Why 'investors' should consider that an unequivocal negative for the investment business eludes me. Pure 'annuity' only providers (if such beasts exist) will simply adapt.

What is important now is that the people for whom these changes are really important, the investors, respond individually to the consultation and do not leave the field free for the vested interests to lobby in for a different set of inefficient and costly restrictions.

I forgot to add the last part of my scheme. You can give away from your assets a regular sum out of your income which is not subject to the 7 year survival rule. You must be able to afford to live off the rest of your income without a negative efffect on your standard of living. You can not top up your funds by drawing capital from elsewhere. So , increase your income from your drawdown sipp by say 30,000 a year & give it to the kids. Always leaving enough in the sipp pot for the missus.

In just over a year, the two Eds will probably be in charge. So,whatever your plans,best not to dither. Get as much out of your drawdown and salt it away somewhere else.The rules will change once Ed Balls is Chancellor. Labour have a history of robbing pensioners.

Quite right Anon 1 & H2Nick, this is a bribe to their core voters. (Don't get me wrong , I love it) Even the Tories would take it away when the next crisis comes if they are short of cash. By the way if you are well off there is always the danger of the tax free pot being reduced again & the 25% tax free lark being capped by any of the parties. Get control while you can!

slightly off topic...but a propos..how come the need to fix the pension system that has directly impacted everyone for decades isn't a scandal like rigging LIBOR? why aren't insurers facing massive fines from the regulators? is it because they are too smart to prosecute (TSTP) as opposed to TBTF?

I assume you are saying the annuity providers including many mutuals colluded with each other to keep annuity rates high over many years i.e anti-competion law practices. It was the State that insisted we had to buy these products.